China

How Resource Scarcity Constrains China

A farmer plows his nearly dried-up rice field during a drought in Shenzhai village, central China's Hunan province

China’s sheer vastness is arguably both its greatest strength and greatest weakness. China can harness the manpower and brainpower of 1.3 billion people, but it also has 1.3 billion people to feed, provide education and health care for, and supply energy to. In celebrating or bemoaning China’s rise, analysts can play up either side of the coin. Damien Ma, a fellow at the Paulson Institute in Chicago, and William Adams, a senior international economist for PNC Financial Services Group (PNC), have written a new book exploring the concept of scarcity in its many facets—from natural resources to implied political limits—and examining potential impacts on China’s future and the world’s. The authors of In Line Behind a Billion People recently shared their thoughts with Businessweek.

Natural resources are the most concrete example of how scarcity limits China, so let’s start there. What do you see as China’s most serious environmental constraints?

Damien Ma: No matter which way you slice it, China just has a low natural resources-to-population ratio to begin with. You could say that China’s “default setting” is resource scarcity—about the only thing it has in abundance is coal, which is also why it uses so much of it. But the reason this is going to be an ever-larger problem is [that] China’s current growth model has severely exacerbated resource scarcities, from water to land to energy. And we suspect the full ramifications of that growth model on limited resources are going to be more evident in the coming decade as the country reckons with the environmental and resource cost of that growth. Not to mention how the intensification of climate change effects could put further pressure on this kind of scarcity.

If I must pick one, I’d say water scarcity is going to be the gravest challenge. China has only about one-third of the world’s average in per-capita fresh water availability. In contrast, the U.S.’s Lake Michigan alone contains something like 4 percent of the world’s fresh water. Little wonder that many Chinese look with envy at the U.S. and see endless fecund land and abundant natural resources, with only about a quarter of China’s population competing for those resources. Looking a bit into the future, there are going to be significant competing demands for water in China, not just from industrialization and agriculture, but also from urban consumers as China continues to urbanize.

One of the key hurdles to China’s urbanization plans—and desire to stimulate a consumer economy—is the longstanding hukou system of residency permits, which limits the ability of new urban migrants to obtain access to local health care, education, and other services. Usually this is discussed as a social justice issue, but in your book you look at the hukou system through the lens of scarcity. Can you explain this a bit? And what do you think might be a smart, or likely, way forward?

William Adams: From a realpolitik perspective, you can argue that the government historically used the household registration system, or hukou, to maintain the support of the urban middle class, which was basically happy to have the authorities keep rural Chinese from flooding into urban schools and hospitals or overwhelming pension funds. The urban bias in public spending is an important reason why China’s urban middle class still supports the government, despite Internet censorship, corruption, and other complaints.

But the need to move rural Chinese into cities and allow them to participate in urbanization and a domestically oriented economy means that the household registration system is increasingly incompatible with the country’s growth strategy. The system won’t change overnight, but the government is likely to equalize access incrementally to health care, education, and pensions for urban and rural households to make the urbanization process possible and less destabilizing.

This change has important implications for the future makeup of China’s economy: Health services and retirement care, for example, are likely to grow even faster than the rapid growth of the Chinese retiree population implies over the next decade. It’s reminiscent of Chinese growth themes from 10 years ago—strong secular growth and rising penetration of an addressable market translating into a sector growing much faster than the overall economy.

Your book also discusses high-quality education as a scarce resource in China. One of the most significant and painful milestones in every Chinese young person’s life is preparing for and taking the dreaded gaokao college entrance exam. For most universities in China, admission is wholly based on gaokao scores (and sometimes bribes), making the pressure for students to perform well on the test enormous. Can you talk about how this shapes secondary education in China?

Ma: We certainly don’t envy Chinese high-school students. The social pressures are so high precisely because everyone knows how limited the choice slots are for top schools. There was a particular anecdote in our book about how a family decided not to tell their son that his mother had passed away until he had finished the gaokao. That basically captured how intense and soul-crushing this competition for educational attainment can become in today’s China.

This kind of “public goods” scarcity has several implications, in our view. One, it will probably make it harder for Chinese urbanites to relinquish their privileges of urban resident status that gives them a leg up in getting into the good schools. It may also exacerbate social cleavages between urbanites and migrant residents who are now living in cities almost permanently. Two, competition is so fierce over a limited resource at home that more young Chinese, especially those families with means, are going to “opt out” of their education system and get a degree abroad. We are already seeing that happening in the U.S. But if the domestic system does not change, many more Chinese students will want to try their chances in Western countries where there isn’t a gaokao (the Chinese think the SATs are pretty easy by comparison) and where education quality is perceived to be much higher.

Also on the topic of education: Every year when the Times Higher Education releases its World University Rankings—and other institutions release their own lists—it’s reliably a headline in state-run newspapers if any Chinese universities crack the top 50. In fact, a disproportionate amount of government funds are channeled toward the ambition of making China’s very top universities-especially Peking University and Tsinghua—world-class, while support lags far behind for other universities. Do you think China is making the right choice in concentrating resources, or does this only compound problems of privilege and inequality?

Adams The ultimate driver of economic growth in China a generation from now will be the quality of skills held by the average Chinese worker. So as a macroeconomist, I am mostly interested in the quality of the typical Chinese education, not what the tiny minority of elite students are up to. But if the goal is increasing the quality of the average education, do you achieve that by spending resources broadly or by creating centers of excellence?

I’m not convinced there is a definitive answer to that question. In any case, the fact that China’s government and, even more so, the average Chinese household throws so much of [their] resources at educating the next generation is a strong signal that the country is developing the human capital needed to escape the middle-income trap. It’s one more reason why China can be expected to be one of the world’s most dynamic markets even after industrialization and urbanization slow down.

The last section of your book discusses how scarcity affects Chinese politics. Can you explain what you mean by “political scarcity”? Do you thinks China’s current leaders are adequately aware of the implications and able to manage the risks—and for how long?

Ma: What we really mean is a scarcity of the kind of institutions that increasingly middle-class Chinese people demand. Put another way, this is a supply-side governance challenge. The Chinese government must now deal with a much more pluralistic society and middle class, which may no longer be entirely convinced of the old growth-for-stability bargain that’s been the status quo in authoritarian China for the past several decades.

There is an entire generational cohort of Chinese who are in their 40s and 30s, and younger, that have little idea of what the previous era of material scarcity was like. They instead have more modern and demanding expectations of how the government should function. This stark generational discontinuity will be an enormous challenge for the Chinese state to reconcile. How China navigates these issues will shape what kind of country it may become, politically and socially. To us, this seems like a much more important issue going forward than whether the economy is growing at 7 percent or 7.5 percent next year.